Launching a rights issue used to be a very big deal. If the accompanying news was good, it had to be very good. If it was bad, the company had to put a compelling case to shareholders about why it was going to get better, often by handing them the chief executive’s head on a platter.
Nowadays, the pitch from some companies seems to be: “Well, we messed up a bit and, er, we’ve got rather a lot of debt and, er . . . can we have some more money, please?”
That is what National Express is saying, at least according to the Cosmens, the Spanish family that owns 19 per cent of the shares. They argue that the embattled train and bus operator needs a “well-defined strategy” before launching the expected £300 million rights issue. Although one large shareholder, M&G, has come out in support of a rights issue, other investors are also unhappy with what they see as the company’s rather cavalier approach.
The fact that the company seems to be pressing ahead with the issue, despite the lukewarm reponse from shareholders, may have something to do with the changing economics of rights issues. Until relatively recently, rights issues shares were sold at a discount of about 15 per cent to the market price and the banks would charge 2 per cent to guarantee the company would get its money. Nowadays, the discount is nearer 40 per cent and fees run as high as 4 per cent. Even allowing for increased market volatility, this makes them a more attractive proposition, both for the banks and for the institutional investors that agree to take up any unsold shares as subunderwriters.
These subunderwriters are usually existing shareholders, but increasingly banks are offering a chunk of the action to hedge funds with no existing investment. During the recent spate of rights issues, this has become a very important income stream for some funds.
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The worry is that this trend makes it easier for companies to get an issue underwritten, without putting a convincing long-term investment case.
Investors who buy a National Express ticket have a right to be told where the bus is going.